FX Viewpoint 12 Nov 2021 | 2022 FX outlook in a nutshell | Article – HSBC VisionGo

2022 FX outlook in a nutshell
Finance  ·    ·  6 mins read

  • We trust that the USD should continue to strengthen gradually
  • Yield levels and potential to speed up rate hikes should support currency performance, for example, the AUD
  • Rate-hike laggards, such as the EUR and JPY, are likely to weaken

We believe ongoing slower global growth and the pending lift-off by the Fed should support USD strength

We have been focused on the USD transitioning from a weaker to a stronger state this year. Our central argument has rested on two factors coming together to support the USD: (1) a moderation in global growth and (2) the Federal Reserve (Fed) embarking on a gradual path towards eventual rate hikes. These two forces are likely to remain crucial and should support the USD to strengthen gradually in 2022. 

Yield levels and potential to speed up rate hikes should support currency performance, in our view

As the Fed’s balance sheet growth winds down in the coming months, this will only emphasise the longer-term force of policy divergence, in our view. The USD’s short-term yield advantage will widen further versus the rate-hike laggards, such as the EUR and JPY. The EUR may be particularly vulnerable as we believe the tightening that is priced in for late 2022 is excessive. The European Central Bank (ECB) may still be expanding its balance sheet in the latter part of 2022, rather than thinking about raising rates

The more the RBA is inclined to shift away from its dovish guidance, the more support the AUD can enjoy from these elevated rate expectations

While we believe the USD should be in a stronger position in the coming months, some currencies may hold their own. The AUD, for example, is well-placed on the rates front. The Reserve Bank of Australia (RBA) maintained its dovish forward guidance for most of 2021, but the recent upward pressure on shorter-term rates and stronger local data surprises (Chart 1) led the central bank to abandon its 3-year bond target sooner than previously expected. There is room for further hawkish surprises, which would be supportive for the AUD, relatively speaking. 

We expect the NZD and CAD to weaken modestly in 2022

The NZD and CAD offer relatively high forward-looking yields but much of the expected monetary tightening could already be discounted (Chart 2). It will be harder to see a more aggressive tightening than is priced in, unless markets see much higher longer-term rates. As we expect the USD to be broadly stronger in 2022, both currencies are likely to weaken modestly from their current levels. 

If global growth re-accelerates, there will a temporary period whereby the USD struggles

As always there are risks to our view. If supply-side bottlenecks suddenly subside, creating the potential for global growth to re-accelerate that coincides with USD weakness. Nevertheless, we think this would be a temporary phenomenon. 

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